UBS Year Ahead 2026 - Escape velocity?

Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. As we are quickly nearing the end of 2025, investors are turning focus to 2026.

And with that, for today, we will focus on the year ahead publication from the UBS Chief Investment Office. A title is Escape Velocity. And joining me for the conversation today right here in studio, glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.

Jason, it is hard to believe, though, here we are just a month or so away from the start of a new year. So a lot to discuss today with our listeners and clients. Thank you, Jason, for joining us and very much looking forward to this year ahead conversation.

It's a pleasure to be here, Dan. Yeah, I can't believe we're at the end of the year. I'm still wondering if I've maintained my New Year's resolutions from back in January.

Well, we'll come up with new ones in a couple of months, right? Exactly. So I have to ask at the start here, Jason, about the title for the year ahead for 2026, that being Escape Velocity.

What exactly does that mean? Well, this is a term from physics and escape velocity in physics means or it is the idea that it's the minimum speed that an object needs to break free from Earth's gravity. So the idea is that, you know, and the title has a question mark, escape velocity kind of question mark.

And basically, we're asking that, you know, for the markets, you know, for this year and looking ahead for 2026, you know, in some way, the big question is like, will all this AI investment innovation, you know, the fiscal spending, easier monetary policy will help the global economy break free from kind of the weight of, you know, debt, there's political uncertainty, there's lingering inflation. So essentially, will the goods potential from from these other factors, you know, outweigh and allow us to kind of move forward, and especially, you know, as we kind of come towards the end of the year, it does feel like the US economy, you know, it's kind of limping along to some extent. So do we kind of escape that and I often like to think about, you know, and we've talked about this before, like kind of the roaring 20s thesis, you know, we're at the midpoint roughly of the decade, and to really kind of maintain sort of a roaring 20s scenario for the rest of this decade, do we escape some of the lingering challenges from this year and kind of have AI be a key driver and policy being more supportive for that going on?

That was a key question we asked at the start of the year for kind of the roaring 20s idea, make or break here, will AI prove ultimately be supportive? And will policy be supportive in some way looking ahead to next year, those questions aren't fully answered, which is why I think escape velocity kind of asking is a question will we achieve that? And I think that's the overall framework, AI is central to all this, because it's going to drive a lot of investment, it could be the key to driving productivity gains, which I view as sort of a key scenario for, for the rest of this decade being a strong decade sort of reminiscent of the 1990s.

We need that to really kind of have a new kind of growth cycle. You know, and then investors, you're looking at what all this means for structural change, that's kind of creating sort of opportunities, and will it be lasting change and opportunities or not? And that's kind of the overall framework of this year has kind of asking this this point, will we kind of move past a year that's been challenging to some extent for the economy, even though financial markets have been actually quite good.

So with that context, now that we understand the meaning behind the title, let's begin with the outlook Jason for the US economy. What are CIOs expectations heading into 2026? Well, ultimately, we think from a year over year perspective, growth will be better in 2026 versus 2025.

Now, this is modestly so I mean, we're looking at near trend growth in 2025. The big caveat being, you know, that we don't yet have full data for even for the third quarter as we are recording this. And so we're saying roughly 1.9% growth this year and 2% next year.

The key thing is, is kind of growth accelerating. So as we end the 2025, we had a month and a half government shutdown, the lingering effects of tariffs still win on the economy. You know, the Fed is cutting rates, but maybe the full impact of easing hasn't fully kind of filtered through the economy.

We also are looking at fiscal stimulus benefits that will kick in to various extents next year, that will provide a boost. So we think growth will kind of accelerate that growth later in the year next year will be better than it is kind of as we enter the year. So that's that's kind of a positive dynamic overall, obviously, a lot of concerns about the overall state of the consumer and households.

It's important to look that in aggregate household finances are still in really good shape. Consumer spending continues to be resilient based on the data that we have thus far. The labor market is certainly soft.

But ultimately, we think that what will drive the economy forward will cause the labor market to inflect modestly high, meaning job growth is probably troughing around year end, and we'll start to pick up a little bit into into next year. That said, there is a sort of this K shaped, you know, aspect to the economy where upper income households are doing well, lower income are struggling. And we're seeing some stress more and more kind of come into lower end consumer can this filter up into the middle or even upper end consumer.

Thus far, that hasn't been the case, we don't think that will sort of materialize. But that in some ways, sort of the key risk for for the state of the economy is that are there enough pain points already, that even a policy gets easier, it's sort of, you know, it's coming a little bit too late, there's sort of the policies is too slow. That's the US outlook.

Some of the same general themes of growth get looking better in 26 versus 25. This is true kind of globally, you know, we expect to see that in Europe, where some of the German fiscal stimulus, you know, should kick in infrastructure investments. You know, the Asia impact is really by trade and tariffs and some uncertainty, you know, growth should kind of pick up there as well.

We're seeing, you know, signs of, you know, more fiscal stimulus in Japan, China also trying to take some measure to stimulate growth. So the global backdrop is one of the whereas growth should be stronger next year, it's kind of accelerate as the year goes on. So let's dive a bit deeper into the year ahead report within three main questions are asked.

Those are can AI power the market even higher? How will governments manage rising debt? And how will politics shape markets in 2026?

So as a bit of a lightning round, Jason, can you provide us with quick answers for those three questions? Well, from the markets perspective, the AI one is probably the key because it has been driving markets higher, right? And everything else is a little bit, you know, at this point, sort of secondary.

So we know that, again, in the past few years, investment spending has been sort of a key driver for the AI trend every year, the data we're getting in this investment spend from say, the hyperscalers keeps getting ramped up 30-40%. In the next couple years, we could be looking at close to half a trillion dollars of spending for some of these hyperscalers collectively in terms of AI investment. So dramatic increase there.

You're going forward that momentum really needs to continue for this momentum to continue. These tech leaders and investors really have to believe that, you know, the demand, the future for AI computing of running models, of not just asking chat GPT questions, but embedded into a variety of different tools and applications is going to justify the investment so far. And in fact, even maybe call for more investment.

Now, given the investment thus far, if it comes down to do we need it just as, you know, chatbots can ask him, you know, plan me a trip for Italy next summer in Europe, we probably have enough demand. But if we start to think about agentic AI, or applications that our companies are using to actually solve problems, you know, physical AI, like robots and autonomous vehicles to run those models, then I think the answer is no, that actually don't have enough, you know, kind of AI investment. So I think that's kind of where we would lean.

So that's kind of the AI question. In terms of the government debt levels, look, there, you know, we're not seeing any signs really at this point in time of a plan to bring down the debt and deficit in the US and but it's also kind of the case elsewhere. If anything, we're seeing in order to get, you know, budget deals passed, for example, in France, you have some compromising or sort of raising the retirement age, meaning bigger deficits, all sequel there, Germany is willing to actually spend more and sort of increase their debt and deficits in the way they haven't before Japan, you know, the policy is looking to be, you know, sort of expansionary.

So no kind of clear signs of trying to address this, you know, not raising taxes or cutting spending, in fact, it's kind of going in the opposite direction. So ultimately, that kind of leans us in the direction of that, you know, we'd expect more forms of sort of financial repression, where you get fiscal policy and monetary policy, either explicitly or more implicitly sort of, you know, partnering together, where central banks essentially keep rates lower, keep policy loose to support, you know, the fiscal expansion to keep rates from kind of going higher. And there's different ways that can be done.

But I think that's, it may not be suddenly a switch train in March of 2026, but the direction of travel, we think about the next few years, that is certainly, you know, case and we think about the potential nominee for the next Fed chair, the expectations, there'll be someone who's going to be on the dovish side, who'd be kind of making the case for for kind of cutting rates, you know, this all sequel versus a more hawkish view. Partly that's just that you have to run perhaps the economy a little hot and have monetary policy keep rates low in order to deal with these debt problems. Then in terms of the the last question, you know, in terms of how politics will shape markets for next year, like we just think about the US, you know, coming not too long after you have some special collections and some governorships, the New York City mayoral election, it's clear there's been an inflection point just in a matter of a few weeks in terms of the political dynamic in the US where inflation which for the markets have been sort of moving past this year, even with tariffs.

That's maybe true from a markets perspective, but from a political perspective, inflation affordability remains almost top of mind for for the Trump administration and policymakers in the US. I think that will influence how they think about, for example, tariffs and their willingness to push forward on tariffs, or maybe even sort of dial them back. That's one example that's going to influence relationships, you know, geopolitically between the US and its trading partners, and what is expected, where can investment go?

President Trump has certainly made a big deal of, you know, of announcing deals where as part of like the deal framework, say with the EU, or Japan, or South Korea, is that those countries invest a lot in the US. So perhaps, you know, the goal would be, all right, even lower tariffs, but then you've got to invest more things along those lines. So politics definitely will shape, you know, the markets in the US, but also kind of globally, you know, factoring also in like geopolitical concerns, US, China, you know, race to dominate AI sort of, you know, the sort of the, you know, the world's moving in a bipolar dimension.

So all these things, AI, you know, large debts, deficits, how do policymakers deal with that? And then just sort of the geopolitics, the politics of it all, will certainly influence policy to AI and other factors. So a lot there that may shape markets in 2026.

Jason, as we often do, let's end on portfolio positioning. So can you share with us the top investment ideas and portfolio messages from the UBS Chief Investment Office as we enter into 2026? Well, we'll start with with equities, you know, already back in October, we upgraded equities to attractive and as part of the year ahead, we've also upgraded, you know, Europe to attractive as well.

So kind of across the board, we see opportunities and equities and so kind of key messages is just to add to equities. We are doing this at a time when markets have been sort of choppy, you know, a little bit, you know, soggy, you could say, and investors kind of questioning the investment in AI kind of concerns about the macro environment, there's some sort of fatigue in some of these themes. And perhaps some of this is just reflecting investors towards the end of the year de-risking, So fundamentally, on a one year view, if I lay out that framework that I mentioned of, you know, growth that's likely to accelerate, you have policymakers, including the Fed that's looking to maybe cut rates and ease policy to some extent, and spur kind of growth.

All that to me is an environment where equities are an asset class that should do kind of relatively, you know, well, you know, within the US, we can hear like sort of technology as a sector, financials and banks specifically benefiting from sort of deregulation. And if you want to create increased economic activity, certainly encouraging banks to be able to lend more is a key part of that, you know, outside of the US in terms of sectors in Europe, like industrials, you know, something that would benefit from sort of the reindustrialization of Europe. That's the relative strength more so than technology.

Thinking about again, sort of the sort of transformational innovation to this is another kind of key message. You know, obviously, AI is central to that. And this spans both kind of enabling kind of layer, meaning like building actual data centers and semiconductors to the knowledge and application layers.

And so companies that to kind of, you know, kind of cover that lifespan, but also, you know, you know, power is a key part of that, you just need the demand for kind of electricity. Kind of related to that, we think of a lot of the US companies in AI, but China is also a formidable, you know, kind of country in the AI space, and we think there's opportunities in China. And that AI innovation and spending will keep driving or continue to drive strong growth in China's tech sector.

And so we actually think earnings could rise an extra 37% for China tech. That's so, you know, very sizable earnings growth. So opportunities there.

That's largely the equity space within fixed income. It's a bit of the same message we've had for a while. Spreads are tight, yields are relatively low.

So you have to be sort of creative and sort of diversified where you see, you know, income opportunities. We maintain sort of up in quality, you know, bias at this point in time, fair being securitized credit, like agency MBS, EMBS over corporate credit. Certainly later, like in this year, towards the end of the year, there's been concerns about to finance a lot of AI investment, you see a lot of debt issuance by these kind of companies.

So the concerns about are you getting compensated for that risk? That's not the case in sort of the securitized credit space. So you know, overall, and in terms of interest rates, ultimately, we, you know, we think that rates probably range bound, but sort of, you know, you're not taking a lot of interest rate risk at this time.

Another message we've had for a while is kind of go for gold, essentially, but we kind of broaden that out to kind of commodities overall, in a global environment, where growth is likely to accelerate and be higher next year. We think that's enough, generally, that's a favorable environment for commodities. Commodities tend to lag, meaning demand has to pick up, supply gets squeezed, demand has to respond, or supply has to respond, but it takes a while, and prices go higher.

So things like, you know, metals, industrial metals, actually agricultural products, in addition to gold are things that we kind of like specifically in the kind of commodity space. And we think it can be a diversifier in an environment where inflation may persist and be a little bit sticky. Commodities tend to do relatively well in that environment.

So some of those are some of the main kind of ideas, some that we've already been kind of seeing for a while, but also definitely some new ideas as well for next year. Well, that all lends itself, Jason, to many follow up conversations we will have throughout the course of 2026, as we track the market and macro trends you shared with us today to be mindful of in the year ahead. Although, Jason, thank you for dropping by the studio, as always, to keep our listeners, our clients informed.

You're welcome, and enjoy the rest of 2025 before it'll be another exciting 2026, presumably. And we'll follow up on those resolutions in a couple of months. Sounds good.

Thank you, Jason. Again, today we have been joined by Jason Draho, the head of asset allocation for the Americas with the UBS Chief Investment Office. I do want to point you, our listeners and their clients, to the website UBS.com forward slash year ahead.

That's all one word. Again, UBS.com forward slash year ahead, where you can locate all resources as it relates to the 2026 year ahead. Again, the title of the publication, Escape Velocity, posed as a question.

From UBS studios, I'm Dan Cassidy. Thank you for joining us. Thank you for tuning in.

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